Austal Limited

Public CompanyIncorporated: 1987 as Austal Ships Pty. Ltd.Employees: 1,273Sales: AUD 321.3 million (2005)Stock Exchanges: AustralianTicker Symbol: ASBNAIC: 336611 Ship Building and Repairing; 541710 Research and Development in the Physical, Engineering, and Life Sciences

Austal Limited is the world's leading manufacturer of high-speed ferries. It also produces a broad line of other vessels, ranging from luxury yachts to military patrol boats. The company has always been primarily an exporter, and a U.S. manufacturing subsidiary set up in 1999 is expected to be a major source of growth. About 70 percent of revenues come from military sales. Austal is touted as a success story for Western Australia, whose shipbuilding tradition goes back decades.

Origins

Austal Limited dates back to the June 1987 founding of Austal Ships Pty. Ltd. by John Rothwell, a boat builder from Fremantle, Australia. The business began with about 40 employees. It bought a second shipyard in 1992.

The firm was based 20 kilometers south of Perth in the Henderson Industrial Area. The West Australia government had designated this space for shipbuilding, which had flourished there in the days of steel-hulled cray (or lobster) boats.

Austal focused on the Asian market at first, and found great and enduring success in China. By 1993 Austal was the world's leading producer of 40-meter passenger catamarans. Sales were AUD 85 million. During the year, the company introduced gas turbine power as well as its own Ocean Leveller ride control system on two ferries in Hong Kong. Austal soon added large, high-speed vehicle ferries to its lineup.

These could carry automobiles and passengers at 35 to 40 knots, about twice as fast as conventional ferries. They were typically powered by multiple 20-cylinder diesel engines made by MTU of Germany. The 40-meter ferries cost about $5 million each.

China was among its largest markets, acquiring nearly two dozen ferries in the early 1990s, most destined for the busy waterways of the Pearl River Delta. Austal Chairman John Rothwell told the South China Morning Post that the key to the company's success in the People's Republic was its ability to customize vessels to the operators' requirements, combined with speed and affordability.

According to Business Week, Australian Prime Minister Paul J. Keating wanted to downplay the country's historical ties to the United Kingdom in favor of a role as an integral part of Asia's booming economy. Austal made its first sales to Britain and Japan in 1994.

In 1994 a group of venture capitalists acquired 30 percent of equity for AUD 15 million. Austal was spending AUD 18 million to expand its shipyard, adding space for two more 50-meter vessels and two more 100-meter vessels to its previous capacity of four 50-meter vessels. It also was adding computer-aided design and cutting tools to speed production.

Huge Growth in the Mid-1990s

Employment tripled to 750 from 1993 to 1996, reported the West Australian, exhausting the local supply of skilled workers. The company was scrambling to fill vacancies through an intensive four-month training program called TAFE. Austal was one of the largest employers in the west, and its economic impact extended to hundreds of jobs in support businesses.

Australia exported AUD 500 million worth of ferries in 1995. Its success inspired other countries such as Italy and Spain to enter the high-speed business, observed Marine Log. Austal delivered its first vehicle-passenger ferries to Europe in 1996. By the end of the decade its crafts were operating in Scandinavia, Greece, Turkey, the English Channel, and the Irish Sea. (After years of conquering world markets with its ferries, Austal would finally sell one to a local operator, Kangaroo Island SeaLink, in January 2002.)

According to Lloyd's List International, Austal exported nearly AUD 140 million worth of ferries in 1997. The 82-meter Auto Express series was the largest in Austal's product lineup. It had a capacity of 200 automobiles and 800 passengers and could be unloaded and reloaded in 15 minutes.

Public in 1998

In its first ten years, Austal produced about 50 ferries. All of them were exported, according to Lloyd's List; more than half went to Chinese operators. The financial crisis in Asia put a damper on its business there.

Austal had a rival in its Tasmanian neighbor, Incat, for leadership of the world's high-speed ferry market. Incat would go into receivership in 2002, however. Other Aussie competitors were South Australia Ships and Advanced Multihull Design. Image Marine, a maker of 40- to 50-meter aluminum vessels, was acquired in July 1998.

The company began delivering ferries to Greece in 1998. The country was an established operator of high-speed ferries and was beginning to replace its fleet, observed Lloyd's List. Around this time, Austal introduced a shorter, 48-meter version of the Auto Express to a Caribbean operator. It had a capacity of 329 passengers and ten automobiles. Austal also had begun to design cargo-only vessels.

Austal Ships went public in December 1998, offering 16.6 percent of shares on the Australian Stock Exchange. By this time, Austal had 1,000 employees and sales of about AUD 196 million a year, or 14 percent of the AUD 1.4 billion ($885 million) world market. The name was shortened to Austal Pty. Ltd. a few months before the initial public offering.

The military business was growing fast. Austal won a contract to build eight Bay Class patrol boats for the Australian Customs Service in 1998. Other customers, such as the Royal Australian Navy (RAN), soon followed. The Republic of Yemen ordered ten patrol boats in 2003. In 2004 the company began to produce 14 new 56-foot patrol boats for the RAN over a period of 42 months. As part of the AUD 550 million contact, Defense Maritime Services was hired to service these vessels for 15 years.

Acquiring Oceanfast in 1999

In May 1999 Austal bought Oceanfast Ltd., one of its Hendersonville neighbors, which made a range of vessels including smaller ferries and high-end motor yachts. Oceanfast had a reputation for quality of styling and finish but was undercapitalized. Austal underwrote AUD 8 million in debt as part of the acquisition.

Oceanfast had been formed in 1983 by businessman Don Johnston and John Farrell, who would be its CEO. Sales were AUD 50 million in 1996, when the venture employed 400 people. Oceanfast had teamed up with Austal in the Ferries Australia joint venture to market vessels in the Baltics.

Oceanfast raised AUD 5.5 million in its September 1997 public offering. Turnover slipped to AUD 20 million to AUD 30 million a year, or one boat a year, by the end of the decade but the company was hoping to triple that with a new line of long-range expedition yachts. The first of these was ordered by Australian golf legend Greg Norman, nicknamed "Great White Shark."

Austal looked for growth from the yacht business as a slowing global economy discouraged ferry sales. This was to be an expensive proposition, however. The company lost AUD 18.7 million in the 2002–03 fiscal year, in large part due to cost overruns at the Oceanfast unit, which was losing money on a AUD 70 million luxury craft for Norman and two other boats. Millions in losses at the new U.S. branch were also a factor.

New U.S. Unit in 1999

To court U.S. business, in December 1999 a Mobile, Alabama shipyard had been established in partnership with Bender Shipbuilding & Repair Co. The facility originally employed 180 people.

Austal was able to win a contract from the U.S. military in 2001 in spite of its protectionist tradition. Austal was the Marine Corps' first supplier for the high-speed 101-meter Theater Support Vessel. Based in Japan and dubbed WestPac Express, it could carry a battalion of 950 Marines and 550 tons of vehicles.

The U.S. unit also attracted civilian business. Two supply vessels were delivered to Otto Candies LLC in January 2002. Florida's Island Queen Cruises ordered a 34-meter dinner cruise ship. It sold an AUD 6 million, 26-meter passenger ferry to New York's Lighthouse Fast Ferry in the spring of 2002. A year later, it was hired to build an AUD 28 million ($19 million) 50-meter vehicle-passenger ferry for Lake Express LLC of Milwaukee, which was operating a service across Lake Michigan. This was the first high-speed vehicle-passenger ferry in the continental United States.

Company Perspectives:

Austal's vision and continued focus is to provide customers with the perfect solution, designing, constructing and delivering vessels that are ideally suited to operational requirements and fully comply with the needs and desires of its customers.

Trimarans in 2003 and Beyond

The development of a slender, stabilized monohull (trimaran) design opened up new vistas for Austal in both civil and military markets. In June 2003, Spanish company Fred. Olsen, S.A. became the first to order a new 126.7-meter cargo-vehicle-passenger fast ferry, which would be the largest of its kind in the world, with a capacity of 1,350 passengers and 341 vehicles. The AUD 100 million Benchijigua Express, which was placed into service in the Canary Islands, also would be called the largest aluminum ship ever built upon its launching in September 2004. Its trimaran design would be the basis for a new fast vessel for the U.S. military.

Austal USA was a subcontractor to General Dynamics subsidiary Bath Iron Works on a contract to design a new high-speed surface vessel, the Littoral Combat Ship (LCS), for the U.S. Navy in 2004. Austal USA started a $25 million, 120,000-square-foot expansion in January 2005 and was adding 600 jobs to support LCS work during the design phase.

The LCS project had a potential total value of $14 billion for 57 ships. In October 2005, the Bath team won a $223 million contract to build the first of two vessels. Half of this was designated for Austal USA's construction of the seaframe, making it Austal's largest contract to date.

Austal had 1,200 employees by the end of 2004. Net income was AUD 20.1 million ($13.6 million) on revenues of AUD 310.1 million ($213.9 million).

The company delivered its first Armidale Class patrol boat and 127-meter trimaran to the Royal Australian Navy during the 2004–05 fiscal year. About 70 percent of the company's revenues for the next three years was expected to come from military sales. Total revenues were AUD 321.3 million in 2005.

The company's U.S. facility in Mobile, Alabama, was designed to withstand a Category 4 hurricane, and only suffered minor damage from Katrina in August 2005. The facility was being quadrupled in size to build the LCS.

Austal was signed up to supply two 340-foot ferries to the Hawaii Superferry project beginning in 2006. This was a planned $100 million interisland ferry service.

Engardio, Pete, and Stephen Hutcheon, "The Newest Player in Asia Is Down Under; After Years of Recession, Australia Is Sharply Boosting Exports to Its Neighbors," Business Week, September 5, 1994, p. 21.

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